Working Paper

The Clean Power Plan and the “Future-Ready” Utility

Feb 8, 2016 | Joseph A. Kruger

Summary

The same principles that will drive reforms to utility markets and regulatory structures can guide implementation of the Clean Power Plan toward a classic market-based structure that will adapt well to future electricity market developments.

Key Findings

  • Changes in energy markets and penetration of new technologies, which are happening regardless of the Clean Power Plan, will require regulatory and market structure reforms.
  • To address this transition, policymakers must align utility financial incentives with policy objectives, value and allocate the costs and benefits of new technologies and services, and provide a level playing field for new market participants.
  • Some of the same principles that will guide policymakers on the design of new regulatory and market structures can help shape decisions on compliance pathways for the Clean Power Plan and can make state compliance easier and less costly.
  • When these principles are applied to Clean Power Plan design choices, the best option is a mass-based target covering both new and existing sources—essentially the classic structure adopted for the successful sulfur dioxide trading program 25 years ago.
  • State policymakers also should consider transparent allowance distribution approaches that support state policy objectives and provide a level playing field for incumbent utilities and new players on the “distribution edge” of the electric grid.

Abstract

This paper explores the synergies between two transformational forces—implementation of the Clean Power Plan and the advent of the “utility of the future”—that could lead to a lower-carbon electric grid with more options and new services for electricity customers. The paper reviews key issues that will shape the transition to new utility market and regulatory structures and finds that some of the same principles that will guide policymakers on the design of these structures can help shape decisions on compliance pathways for the Clean Power Plan. The paper recommends a “future-ready” approach for the Clean Power Plan that will adapt to different market and regulatory structures. This approach includes a mass-based emissions target that covers all sources in the power sector and transparent allowance distribution that accommodates state priorities and provides a level playing field for incumbent utilities and third-party market participants.